How a PepsiCo flavor partner fooled Wall Street and the press

For years, the processed-food industry has searched in vain for a low-calorie sweetener that actually tastes good, let alone one that retains the flavor profile of the underlying product. In 2010, the food and beverage giant PepsiCo formed an agreement with the flavor company Senomyx to “focus on the discovery, development and commercialization of sweet enhancers and natural high-potency sweeteners.”

That partnership appears to be paying off; there is tremendous profit potential for both companies, given the recent dips in soda sales. Which makes the deceptive nature of a recent press release that much more troubling. On March 11 Senomyx announced:

its new Sweetmyx flavor ingredient … has been determined to be Generally Recognized As Safe (GRAS) under the provisions of the Federal Food, Drug and Cosmetic Act, administered by the United States Food and Drug Administration (FDA).

The announcement went on to explain that PepsiCo has “exclusive rights to use the new flavor worldwide in all non-alcoholic beverages.” The sweetener enhancer could also be used in alcoholic beverages, along with a variety of foods. The business news media were all over it, with many outlets incorrectly reporting that the FDA had granted safety approval.

The FDA doesn’t actually approve new food ingredients (with a few exceptions such as color additives). Instead, food makers and ingredient developers self-certify safety, usually through a private organization called the Flavor and Extract Manufacturers Association. And while companies sometimes notify the FDA, it isn’t required. In other words, new ingredients get added to the food supply all the time without FDA oversight. As last week’s scramble made clear, this arrangement is not well understood by the news media. That’s why companies issuing statements should be clear about the process. When Senomyx said its new ingredient “has been determined” to be GRAS under FDA law, the company failed to mention that the safety determination wasn’t made by the FDA, but rather by a private party. While the statement may have been technically accurate, the law requires that such statements also not be misleading or omit material facts.

Seth Lesser is an attorney who practices securities litigation with Klafter Olsen & Lesser. He told me that “under U.S. securities law, companies are not allowed to make materially false or misleading statements.” David Sugarman, a consumer class action attorney, told me he thinks the Senomyx statement represents a “potentially misleading omission.”

The media certainly were misled.

As Politico reporter Helena Bottemiller was quick to point out on Twitter, among the most confused media outlets was Reuters, which ran the headline “FDA says Senomyx sweetener enhancer safe; shares jump.” (Reuters later corrected itself.) Barrons ran the incorrect subhead “The biotech received a nod from the FDA for the sweetener Sweetmyx.” Bloomberg also got the story wrong and later ran an obscure correction.

Investor’s Business Daily scrubbed its incorrect article and later posted an update. The original headline was “Senomyx Gets FDA Approval To Sweeten Pepsi Drinks.” In my Twitter exchange with the IBD reporter, she blamed the company for its misleading statement, and explained she doesn’t usually cover food, but rather aerospace.

Perhaps because it’s unbelievable that the FDA has such lax oversight, we can cut the media some slack. But that doesn’t excuse either the ingredient company or PepsiCo. As Steve Gardner, litigation director for the Center for Science in the Public Interest, told me: “FDA's misbegotten acquiescence in unfettered self-regulation should not be conflated with FDA approval.” 

Reporters got the story so wrong that the FDA was compelled to issue an unusual statement to set the record straight, noting that the Senomyx announcement “appeared to suggest that the U.S. Food and Drug Administration had made the GRAS determination” when this was not the case. In fact, the FDA was not even informed by Senomyx about any GRAS determination for the ingredient. To further drive home the point, FDA warned that “companies should not state or imply that the FDA has made a GRAS determination on their food ingredients.”

Senomyx itself put out a sort of correction, but blamed the media, claiming that its press release was accurate but was “misinterpreted by some members of the media, who reported that FDA made the GRAS determination and/or approved its use.” The statement went on to explain how GRAS works and emphasized that such determinations can “be made without notifying FDA.”

The jump in value of Senomyx shares on the day of the announcement was as high as 26 percent, falling to a 17 percent hike at close. The financial investing-tips site Motley Fool recommended Senomyx as one of its “3 best stocks” that day, also mistakenly reporting FDA approval, while glowing about the ingredient’s potential economic benefits to both Senomyx and PepsiCo:

Leading all stocks to the upside today was flavor ingredients developer Senomyx, which soared 17.2% after the Food and Drug Administration found its Sweetmyx flavor ingredient to be generally recognized as safe.

...

For Senomyx, it could represent the start of a valuable revenue stream, while for PepsiCo it might help jump-start its stagnant U.S. growth.

In other trade press, Food Navigator reported that Senomyx had “been rapped over the knuckles by the FDA for implying that the agency had approved” the ingredient. And Marion Nestle, author of “Food Politics,” took the opportunity to suggest that Congress require the FDA to overhaul the entire GRAS system. She’s not the only one. In 2010, the feds’ own Government Accountability Office conducted an investigation, finding that the “FDA is not systematically ensuring the continued safety of current GRAS substances.” Just last month, the Center for Food Safety filed a lawsuit against the FDA for “failure to protect the public from dangerous food additives by failing to follow legal rulemaking requirements.”

For its part, PepsiCo appears to be sitting quietly on the sidelines while its partner takes the heat from the FDA and the media. But given how much the company stands to benefit — and that it was named in the Senomyx release — it also bears some blame. According to Candice Choi of The Associated Press, PepsiCo has experienced its own troubles in accurately describing the GRAS approval process. In an earnings call for investors last February, CEO Indra Nooyi crowed (PDF) about “some promising projects that are currently going through the FDA review process.”

But the company later corrected itself in a filing with the Securities and Exchange Commission, saying that its review had in fact “not been submitted to the FDA” and that instead a “submission will be made to the appropriate reviewing body,” another murky reference to the private self-approval GRAS process.

When the nation’s largest food and beverage corporation and its partners can’t even make accurate statements about the legal status of their own ingredients, it’s no wonder the media get confused, not to mention Wall Street. As securities lawyer Lesser noted, “It appears that some investors were misled.”

Perhaps that was the plan all along.